"Why February Rate Cut is "On the Table" – BSP

Why February Rate Cut is "On the Table" – BSPAs we enter 2025, understanding the economic landscape is crucial for making informed decisions. Recent comments from Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. have sparked interest: another interest rate cut is a possibility. In this article, we'll explore the reasons behind this potential move and its implications for the economy.A Persistent Negative Output GapThe BSP's December monetary policy report highlighted a critical factor: the output gap – the difference between actual and potential economic output – remains negative until 2025. This indicates that the economy is growing below its potential, a concern for policymakers. Remolona emphasized that this negative output gap would necessitate further easing to boost economic expansion.Economic Expansion LaggingGross Domestic Product (GDP) growth fell short of the government's target last year, rising only 5.6 percent from 5.5 percent in 2023 due to a series of typhoons that affected the country in the last three months of the year. This sluggish growth has put pressure on policymakers to find ways to stimulate the economy.Interest Rate Cut: A Potential SolutionThe BSP's Monetary Board reduced interest rates by a total of 75 basis points starting August last year as inflation settled within target. With the output gap still negative, it is likely that the central bank will consider cutting interest rates again in February or later this year to support economic growth.Bank of America Weighs InIn its commentary on Friday, Bank of America (BofA) suggested that the underwhelming GDP results could prompt the BSP to cut interest rates twice in the first half of 2025. This would result in a total rate cut of 50 basis points, lowering the policy rate to 5.25 percent.Analysts Weigh InMost analysts expect the central bank to continue easing to support economic growth and despite inflation having fallen back within target. Bank of the Philippine Islands (BPI) economist Emilio Neri believes that weaker-than-expected GDP growth has strengthened the case for a February rate cut, citing that with inflation still within the target, the central bank may prioritize growth and support the economy with more liquidity.Risks to Rate CutsHowever, there are risks that could limit the BSP's rate cuts this year. Neri noted that the country's current account deficit remains substantial, making the peso more vulnerable to external forces such as Fed policy and policies enacted by US President Donald Trump. "Aggressive rate cuts from the BSP may exert pressure on the peso," he added.ConclusionIn conclusion, a February rate cut is indeed a possibility for the BSP. The negative output gap, sluggish economic growth, and inflation within target create an environment that calls for more easing to stimulate the economy. While there are risks involved, most analysts expect the central bank to continue supporting economic expansion with interest rate cuts.As we move forward in 2025, it is essential to monitor these developments closely, as they will have a significant impact on our decisions and investments.

Edward Lance Arellano Lorilla

CEO / Co-Founder

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